Depending on the type of personal loan you take out, the consequences of defaulting on one can be quite severe. Not meeting your financial obligations can have repercussions that will resound throughout your life. You do not take out personal loans for specific purchases. Instead, people usually have them for emergencies or debt repayment. These conditions make personal loans a high-risk and high-cost venture.
This blog post will discuss the consequences of defaulting on a personal loan. It will also reveal three tips that can minimize your financial risk when taking on this type of financial obligation.
Your Credit Score Will Plummet
When you miss a couple of loan payments, your credit score will go in a free fall to the basement. Two sections make up your credit report. The first details your credit score. The second shows potential creditors every debt payment you made over the last few years. When you’re 30 days late on a payment, this gets noted on your report. Another marker occurs after the payment is up to 90 days late. When your loan goes into default, your creditor will inform the credit bureaus.
After bankruptcy, defaults work as the second most severe negative mark on your credit report. When your credit score drops, your interest rates will rise significantly. Any other loans you borrow in the future will be a lot more expensive.
Your Assets Could Get Seized
When you use an asset such as a home or car as collateral for a personal loan, you have given the creditor the legal ability to seize such collateral if you don’t make payments. Lenders consider secured loans less risky for them, which means it’s less costly for you as a borrower. But you do take on more risk with these types of loans. You can get personal loans secured against your car, your home, stocks and bonds, and even your business. Until you pay off what are known as secured loans, the creditor legally owns your asset.
When you borrow unsecured loans such as student loans and credit cards, you do not need to put up any collateral. However, you take on higher interest rates and monthly payments. When you default on an unsecured loan, the creditor will still attempt to collect what is owed them. They may use such methods as debt collection agencies, wage garnishment, and taking your tax refund to get the amount owed.
What Can I Do To Minimize My Default Risk?
Make Sure That You Can Easily Make the Monthly Payments
Personal loans work in the same way as other types of borrowed debt. You get paid a lump sum. Immediately you will begin to make payments in monthly installments with interest. Grave consequences such as wage garnishment can occur if you don’t meet your monthly obligation. You need to ensure that you have enough money from your income and savings to make the required payments before you sign the contract. If you foresee trouble with the payment, try excising “wants” from your monthly spending budget. You will surprise yourself at how much you can save if you give up a couple of lattes a week.
Automate Your Payments If Possible
Many creditors allow you to make an arrangement so that your minimum payment amount (or any amount over the minimum that you specify) automatically comes out of your bank account every month. If you set up an automatic payment, you will need to ensure that the money is in your account at the same time every month. Otherwise, you could experience high overdraft fees from your bank. But if you’re careful with your money, automatic payments can work as a good way to meet your financial obligation without any hassle.
Never Take Out A Loan If You’re Not Willing to Face the Consequences
In the worst case scenario, you could lose your job, go through all your savings, and still find that you can’t make payments on your loan. These things happen to financially responsible adults all the time. However clean your credit history seems, you will still face serious repercussions if you default on a loan. If you stop making payments on your vehicle title loans, you will lose your car. If you can’t pay off your credit cards, your credit score can plummet by 50 points or more. You may also face harassing calls from debt collectors, constant bills in the mail, and the inability to receive additional credit.
That’s why the first tip is so important. If you take out a personal loan, perhaps start an emergency fund so that you can make payments if you suddenly lose your source of income.
As long as you’re financially responsible, taking out a personal loan doesn’t have to be an onerous chore. Treading carefully and working hard to pay off the debt at all costs will ensure that the repayment process goes smoothly.
For more on loans and help when you’re having difficulty paying them back check out these articles.